Following the Fed’s announcement, please see below for market views from the Global Fixed Income, Currency & Commodities Team (GFICC):
Consistent with our and the market’s expectations, the Federal Open Market Committee (FOMC) maintained the Fed Funds rate target range of 2.25% ‐ 2.50%.
The May FOMC statement contained changes to the current economic assessment in order to reflect improvement in growth and employment data, but a deceleration in inflation and sequential weakness in Q1 consumption and investment data. The Committee continues to exclude a formal balance of risks from the statement. In addition, the Committee remains “patient” in regards to determining the next policy adjustment in light of “global economic and financial developments and muted inflation pressure”. In a separate implementation note, the Board of Governors voted to cut the interest rate on excess reserves (IOER rate) by 5bps to 2.35% in order to maintain the Fed Funds rate within the target range and prevent the effective Fed Funds rate from trading too close to or above the target range. This change is more technical in nature as a function of money market dynamics and should not be considered a rate cut or a change in the stance of monetary policy.
We can break the statement into two parts:
Chair’s Press Conference
Chair Powell highlighted the improved growth backdrop, diminishing risks related to trade and global developments and easing in financial conditions over the past few months. In addition, the Chair expressed a positive outlook for US growth and the broader economy, but with limited signs of overheating. The main focus of the conversation was on the inflation side of the mandate. Chair Powell detailed the recent path of inflation and explained that the slowdown in core PCE in Q1 as being driven mostly by transitory factors.
The Chair and the Committee remain comfortable with the current stance of policy. The Chair clearly stated and repeated multiple times that the Committee does not see a strong case to move rates in either direction at this time. Questions that attempted to draw parallels between “insurance rate cuts” in the 1990s outside a recession were not validated by the Chair, which viewed this cycle as unique to prior cycles.